FleaBagger (27.99)

Foreclosure rental property

14

I've always been of the impression that a single man can do well investing in a house and renting out two or more rooms. Is this a good or okay time to buy a home in foreclosure and rent it out for fun and profit? I would appreciate comments from people who have done this before, as well as people who have thought it through without any personal experience (heck, I'll even welcome comments from people cracking wise - I can't delete them on CAPS, anyway).

It makes sense to me if you are lowering your monthly expenses. One draw back is that sometimes the other renters are a pain and are not always reliable when it comes to the bills. I suggest making them pay a one month rent check instead of having them pay for utilities and rent each time they come up. Depending on where you live if the taxes are high make the rent a little steeper than what you initially thought. Either way everybody in the house gets a better deal when it is split up.

Buying foreclosures can be a little risky. Make sure you have somebody check it over really well. Everybody's situation is different, so you will have to do the numbers and decide if it is a profit maker or not. Good luck.

Interesting question. One of the things that I think about that doesn't seem to be considered in models is world population. The models assume a smooth transition for population to peak and flatten. I think the whole business of having more space than you need and renting some of it out works extremely well in a growing population environment.

But, how does it work if population growth is flattening? How does it work when there are all these empty houses out there that eventually some that need to work back into the economy.

We live in a world where inflation and growth shape our beliefs, but what if that is changing? I can't see how growth is maintained. It is unsustainable and we are moving into the phase where sustainability rather than growth is the new model.

The other thing you have to look at is who are the renters of shared accommodations? Me, I've always figured there are other things I'd prefer to spend my money on, so all except 8 months of my life I've lived in a shared situation, either a roommate or a partner. I have a roommate now.

So, I personally think there will be more sharing accommodations as financial considerations force it, but I also think there will be some downward pressure on rent as people move to more shared accommodations.

I think about doing this kind of thing as well. Me, I've been a homeowner and I am responsible. My roommate couldn't give a s--t about problems in this home and making sure the landlord knows. He see no responsibility protecting the landlord's investment. He doesn't destroy the place but at the same time, if there is a problem that ought to be reported, well, he says that it isn't his problem. So, for example, you have a leak or water running where it shouldn't, your tenant isn't necessarily going to tell you. Also, tenants tend to not have wealth and they destroy your property there usually isn't any options to recover your losses.

My husband has dealt with many renters who have destroyed property through his former job. I have suggested we do this and he simply refused because the problems can be big.

I think the model of shared accommodation lets you protect your property better, but then there is the privacy issue.

One more thing. My wife and I have been considering a made/renter for our home. This gives me an idea for you. You mentioned you wanted your time back from working by investing, how about getting somebody that cooks, cleans, does groceries, and laundry too. This way you have more time to play instead of doing these tasks. Just a thought.

I use to do this. I would buy a condo, or a house then move into one room, and rent 2 or 3 rooms out. Once this was a stable rental, I moved into another and repeated the process.

Turns out that I lost money will renting these property out - maint. expenses were always higher than I predicted! But when I sold these properties 5-7 years later in made very solid profits.

The key to make this work is the purchase price/full mort payment vs the rental value of the property. So with zero down - figure out the monthly mort payment - PITI. Then research and find out the rental value of the property. It MUST be cash flow positive from day one. Even if its $10 a months, that is OK.

This is the disconnect that is one of the big problems with housing today. Entry level homes must be cash flow neutral or positive with the mort. payment even if they are owner occupied. Never buy an entry level home you can't turn around a rent for the full existing mort. payment.

This is a problem i mentioned. Prices are still too high. For entry level housing - these should be close to cash flowing. Why pay a huge premium to buy vs rent? It is because many were dupped into thinking house prices go up 15% per year - all the time! I am mainly talking about existing housing not new homes. By definition new homes are not "entry level" imho.....

Decling rents are possible, buy very unlikely imho. Households are still being created, and when the wave of forclosures slow down, rents will rise......

"I've always been of the impression that a single man can do well investing in a house and renting out two or more rooms."

It can be, if you can provide them with separate entrances and and bathrooms. At about 25 to 30 years old you will not want roommates. It is tough getting good renters. It is extremely tough getting good roommates. My brother tried this with his condo. He found a "nice guy", who worked in "restaurants". Turned out the guy was robbing banks, part time, police busted down the door and trashed the apartment looking for the guy and evidence.

Refurbishing and renting out a basement is also an idea.

"Is this a good or okay time to buy a home in foreclosure and rent it out for fun and profit?"

Not yet, 2009-11 will be better, wait for unemployment to climb and there will even better deals. They have "free" homes in Detroit, Cleveland, etc... the number of excess apartments and "free" homes will continue to grow and grow.

"I would appreciate comments from people who have done this before,"

I have a couple apartments. The real estate market collapse is just beginning, wait a couplle of years and housing will fall another 20-30% and unemployment will be much, much higher. There will be some better deals. Cash will be king, save money...

Thank you all for your advice and comments. Madcow, if you think I am going to hire a maid, you misunderstand my financial situation (or overestimate my willingness to exploit illegal aliens for below-minimum wage labor).

Abit, I like your advice about waiting. Inertia dictates that anyway, for someone as slow as I. "Cash will be king" only if I am very wrong about future inflation, or you are talking about some other currency than the US$ in which I am paid. I am going to stash my savings in various high-potential foreign stocks.

One option you might look into is a small appt building (4 units or less). This option gives you a similar owner occupied plus income, and preserves some privacy. abit hit it right on the head... finding good tenants is hard (no exp), finding good roommates is (impossible)...

Furthermore, the loan rules on these properites are typically the same as for SFD, as opposed to true appartment buildings, which MANDATE 25% down and a certain threshold of DebtCoverage (20%+)... at least, before this recent credit mess, the rules were the same, now, who knows...

Here is Los Angeles, the prices for these type of properties are very comprable to a SFD. I had seriously thought of this several times, when I was single...

PS, I have a spreadsheet that helps calculate all the factors to owning an income property, (loan ammotization, rental income, op exp, etc) and provides ratio's for payback and cashflow. If you'd like it, email me privately...

Take a little off of the rent when they cook, clean, whatever. This doesn't cause you to put more money out, you just have to make an agreement with somebody willing to clean up after you, while you go and play on the computer. Some are willing to do this despite. If they go grocery shopping give them your list. When they do laundry give them your socks. Just a suggestion if you are a slacker like me. At this point some people are willing to negotiate 50 to 100 dollars to save a little money.

Remember, they need a nice slacker landlord more than you need a crummy tennant.

I'm commenting based on it being on the front page, if that makes you feel better. :)

I've been on the other side of this equation since moving out of my parents' house a couple years after college (2002). I've rented rooms, first in the house of a friend (which he co-owned with his brother, who also lived there), and then with a girl I met on some website for such a purpose (roommates.com or roommate.com or something). Both worked out really well, I think for all parties involved. They had additional income / help paying the mortgage, I had a cheap place to live, and it also felt like a positive thing to do environmentally (not building/heating/cooling/furnishing an entirely separate house, or apartment, for myself). I now live with my girlfriend in a condo we rent.

My advise would be to try to get to know the person some before you agree to let them live in your house, especially if you will be living with them. Go out to dinner with them, or out for a drink, give each other an informal 20 question interview, try to see if you'll be a good fit together. Trust your instinct, you'll know with some people that you just aren't going to get along well.

And don't forget the obvious stuff, check their references, get a credit report, etc. A bit tedious and costs a little, but worth the time and money I think.

Regarding the investment aspect of it, I think the housing market is still in for a rough ride down for the next year or two, followed by a long stretch, 5-10 years, for people to regain confidence in it and for prices to begin to appreciate to 2006 levels again (after inflation). So be sure this is something you're going to be OK owning until 2020, or are willing to risk the possibility of selling for a loss on before then.

Thanks for commenting. I'm glad I'm getting to meet new people as a result of being on the front page. Your insights are from a different perspective, but you seem to come to pretty much the same conclusions as everybody else: being a live-in landlord is generally good, but I will probably be able to get a much better price on the house if I wait a year or so.

Yep, I think that's the case. Unless the government decides to really just print money and inflate (I mean even worse than now), I don't see how house prices won't take another leg down. Beginning in '09, with a new president, whomever it is, I'm thinking they'll be inclined to let the damage hit sooner rather than later, so they can point the finger back at Bush (don't get me wrong, I don't think the finger ought to be pointed elsewhere, and I'm anything but a Bush apologist or supporter).

For sure. I was totally talking in my sleep and said, "man that fleabagger is so cool for making the front page."

Actually I didn't know what you meant by making the front page. I was looking for a link to a newspaper with you doing your happy fatty dance.

What price range/discount are you trying to achieve by going to a foreclosure?

How much time do you have to keep a house up to date?

Yardwork?

Insurance?

New roof?

Forecosures tend to have some things that you may want to pay attention to. An inspection isn't always going to keep you covered from being insured against the possible defects of the house. With foreclosures, you buy the house as is. You don't get to go back to the seller if there is something that wasn't disclosed, because there are no disclosures. Something to think about when buying a foreclosure.

Your writing style is getting pretty good. I read your explanation to TL the other day about your name. Very nice. Good luck if you do buy. What do you anticipate to write about/style in your career as a writer?

Here's something I don't think anyone has brought up yet, but I consider it maybe the most important:

Think about the opportunity cost.

Find out how from someone who knows how much of your time owning a house will take. Consider everything. Landscaping, paying bills, hiring a plumber when the crapper's broken and waiting for him to show up during the 2-5 window he gives you, fielding questions from your tenants and so on. I'm renting and I am amazed how much time my landlord spends kicking around (although I have a suspicion he's having an affair with the crabby lady who lives in the basement).

Add up the total time and divide the net income by that to find your hourly wage.

I don't know what you do for work, but if you like your work and you could put in a few more hours and make more money do that instead: no risk, same return. Also think about other things you could do. If you think that you could squeeze higher return out of your portfolio by a few more hours a week of research, think about that.

My point is simply that from every landlord I've ever observed, it's a lot of work and the better landlord you are the more work it is (and the more likely your tenants are to take care of your stuff).

I'll also reiterate what was said before: get letters from previous landlords, check credit history if possible and don't put yourself in a position where you have to find a tenant by the end of the month. Wait for the right one(s).

Thanks for that insight. I appreciate what you're saying, and I will think about it over the next 6-12 months I spend thinking about whether or not to become a landlord.

As for my job, it is relatively unrewarding financially and spiritually, except for the fact that I often get time to write, and I could not get overtime here, even though I am open to it.

However, the time I spend writing is very valuable to me, and I don't want to limit that for something that is going to be modestly lucrative. I want to limit it for something that will be wildly lucrative. (Just kidding!)

madcow -

I'm a fantasy writer, attempting to emulate the accessibility and breezy spirit of Lewis' TCO Narnia, and the rich depth of Tolkien's LOTR. As I've matured, I've grown to dislike modern fantasy more and more, though I'm not sure I can put my finger on why; I endeavour to be more like the old school than my contemporaries. (My other influences include the Bible, my happy, carefree childhood, and the miserable loneliness of my adulthood.)

Also, I might become a freelance writer for the Fool if I ever get around to applying. I want to feel like a better investor first, though.

That reminds me: I thought it was weird that this article made the front page, since my Bear Sterns article was a shameless attempt to get noticed by the powers that be.

Your front page post was speaking to me! I just bought a foreclosed home at auction and escrow will be closing shortly. I know it is a little too soon to enter the market, but it is too late for me to worry about that and I need to live somewhere.

The house has 3 bedrooms and 2 bathrooms with a garage on a big lot, so I think I could rent out 2 rooms and still live comfortably enough. The rents would help, but my cash flow will be very negative. Here are the rough numbers if this helps you to see all the costs:

Bid price = $380k (this is in southern California)

Auction company added 5% = $20k

Closing Costs = $8k

Down payment 20% = $80k

Monthly payments:

30 year fixed at 5.75% = $2k

Property tax = $450

Hazard insurance = $50

Home owners association = 0

Electric, gas, water, trash, etc. = ?

I think I could get around $600 each per month for renting out the rooms. Definitely not stock market style returns on the investment.

Since 1995, I've owned up to 2 rentals at one time, and it can be alot of work, but usually only during move in/out times. I still have 1 rental that I currently manage. I could echo what others have written above, but let's get down to some specifics, a guideline if you will. I'll get to that in a bit, but regarding how much the rent should be, I used the local classified ads to gauge my property's offering with what's out there, and aim for about the 60%-70% range. Something above halfway, but not at the top end of the range as to scare off everyone. You don't want to be near the bottom end of that range because of the types of people those cheaper prices attract. Sorry, I'm not trying to make any socioeconomic statements here, but having been a keen observer of such traits over the past 13 years and with a serious vested interest in those observations, it's just what I've noticed about human nature.

Quickly, here are some rules/guidelines and things I've learned. These are more from a whole-house perspective rather than individual rooms, but the concepts are the same:

1. Regardless of friend/family/colleague status, always run your prospective tenant through a vetting process. Tell them it's nothing personal, but that as a landlord you are required by law to treat everyone the same (which is true, to avoid discrimination/biogtry charges).

2. Get them to fill out a Rental Application. I'm sure you can find such forms online somewhere. Or drop me a private email thru the CAPS service and I'll send you an example.

3. After they've signed the Rental App, give the necessary info (Name, SSN, DOB, last known residence) to a firm that specializes in Renter Verification. Tell them you are a landlord and are preparing to rent to this person and that you have a signed Rental App. Have them run a background check for: (a) credit, (b) criminal, and (c) civil histories. Here in Oregon, this runs about $25-30 per applicant and will be the best money after you've ever spent in your life. The credit history will tell you if they pay their bills on time (a good indication of the future likelihood that they'll pay you), while the criminal history will tell you if they've had a history of drugs or violence or bad behavior. The civil history will tell you how many proceedings have been logged against them or by them in the county court system (which tells you if former landlord's have had to go to court to get them to pay rent/damages, etc.). This is the most important step of all I've written here. Doing your homework upfront like this will save you years of heartache and much money in the long run. This is where most people screw up, taking a shortcut or going on a "feeling". Think of it as you would an investment in a mutual fund: you can't control as much as what happens after you've invested in a fund as compared to before you've invested in it. You'd examine expense ratios, 12b and front-end fees, 5-yr and 10-yr returns, etc. Do the same with all your prospective tenants, and you'll thank yourself many times over.

4. Passing Muster: Rent should be <= 30% of gross income; all other debt obligations should be <=35% of gross income. More than that, and it's hard for people to make ends meet. You don't want to be one of those unmet ends...

5. If they past muster, ask for a Security Deposit just short of one month's rent (e.g., rent=$600, ask for $550 or $595 in security deposit). Reason: this way, no one can ever claim the Security Deposit as the last month's rent (leaving you with no damage deposit when they move out). This is an important distinction if you ever have to go to small-claims court to reclaim money for damages. Judges will often give the Tenant the benefit of the doubt, and if he thinks the Tenant honestly confused the last month's rent with your security deposit, you could be out that deposit. Also, doing this allows you to start proceedings against your Tenant earlier in their last month because they've not fully paid their rent in the eyes of the law. Otherwise, you'll have to wait 20-30 days later until they move out at the end of that month to go after them for any damage that remained.

6. Have them sign a Rental Agreement, stipulating amount of rent, when it's due, term of contract, and requiring a 30-day written notice in advance of their intended move-out day. Again, you should be able to find forms like these somewhere online (look for "MultiFamily Housing" forms or "Rental Contracts" or contact me privately and I can send you a PDF as an example).

7. When interviewing prospective tenants, it's always a better idea to do it in person. Look at how they dress, how clean they keep their car, if they smell of cigarettes, etc. That's how they're going to live when they're inside your house. Words and "trust me's" are all good intentions/excuses (or sometimes direct lies). People are full of good intentions, but actions always speak louder than words (I have rarely seen a tenant live up to everything they told me during that first meeting). Also, if someone is in a real rush to rent your place, slooooooww down. Do your due diligence. Call their former landlords (not the most recent landlord, who has a conflict of interest to get them out of his place if the tenant is a bad one, but call the landlord prior to that one), and ask questions: did they pay on time? ever have a noise problem with them? any damage left behind? did they give you a 30-day notice to vacate? And the all-important one: would you rent to them again?

8. Regarding questions, verify their employment and salary. Employers are often reluctant to give out direct salary info, but here's how you should couch the question. "Hi, this is . I'm a landlord in the area, and I have here before me a signed Rental Application from your employee, , who wants to rent a room/house from me. I need to speak to someone who can verify their employment, length of service and salary. Are you that person? Good. [If not, hold for the person who is]. All I need you to give me is a Yea or Nay on the following information. They have written here on the Rental Application that they are earning $XXXX per month as a gross pay. Would you characterize that as accurate? Also, it says they have been employed YYYY years with you in a job position as a ZZZZ. Would you say that's accurate? Thank you very much for your time."

9. Preparing a house for rental (cleanup, lock changing, carpet cleaning, etc.) takes time and money. This is the biggest pain about being a landlord, but that's the tradeoff (your time and housing investment in exchange for monthly income via rents). That's why I always go with a yearly contract. (If it's working well after the first year, I might consider going month-to-month). Otherwise, you'll lose a lot of money in turnover costs and downtime. Tenants may not like being locked in for a year, but then again, it's to their advantage because you also can't raise the rent in mid-contract.

That's a good starter list for you. I'm sure I could think of a few more, but I've got to get back to work soon...

Regarding someone's comments above about tenants not being responsible for negligence, that can be categorically wrong. If you include in your Rental Contract that they are responsible for negligence on their part, you can use their Security Deposit to offset those damage costs. Example: The tenant does not tell you about a leaking or busted pipe that floods an area, ruining the carpet, even though s/he was home during that time. They are not responsible for fixing the pipe, but if they could have told you about it in time to prevent the loss of the carpet, they are responsible for that loss due to their negligence.

With all that said, I have to agree with others above on one point: you're going to have a hard time finding something cash-flow positive without putting significant money down (20% or 30% or more), but it depends upon the area.

Finally, I will disagree with my colleagues above in regards to rentals as viable investments over the next 2 to 3 years. It is exactly because of the recession that we are currently in, that people will not be able to afford a house of their own, and more and more people will opt to rent instead. People have to have housing, and the housing markets are overpriced right now almost across the board in every state. Builders are in huge turmoil, many going bankrupt. The equation is very simple to understand: fewer new houses being built + more people concerned about being locked into a mortgage when their job may be disappearing + more difficult housing loan hurdles (finally!) + housing prices falling = greater demand for "temporary" housing. Rentals will be going up, period. I have already seen this personally last month when my rental came open. It was the quickest I've ever been able to rent the place, people were knocking down my door to get into the place, I was able to raise the rent by 5%, and it's still considered under-valued.

Thanks, Gar! This was easily the most comprehensive and experienced post I've ever seen on anything, anywhere on CAPS. I wish I could give your comment a rec. I'll try to remember/look up how to contact you via email for that information. Thanks again!

Note: I have already setup that other players can send me email via my "Change Your CAPS Preferences" link on the Profile tab. If you want others to contact you via CAPS, then you'll need to do the same. However, once you send me email, your email address will be known to me. Then I'll be off with it to a Nigerian prince who needs to collect a huge inheritance if only he could get my help... ;-)

Note: I have already setup that other players can send me email via my "Change Your CAPS Preferences" link on the Profile tab. If you want others to contact you via CAPS, then you'll need to do the same. However, once you send me email, your email address will be known to me. Then I'll be off with it to a Nigerian prince who needs to collect a huge inheritance if only he could get my help... ;-)

I have done this but hated it. If you are in a cash cruch it very helpful maybe to all parties. Living with other people is rough and when their life style and expectations don't meet your own. So is the money worth it? You will lose your freddom and gain problems in addtion to the money. If you sign a contract make sure you can kick them out and quickly. I had a guy not want to leave for 30 days in that 30 days he did a vast amount of damage to the house. It was crazy. It's all a matter of whom is living in the home and really its a gamble.